3 minute read
10 WAYS TO QUICKLY REDUCE IT COSTS
from Cloud champions
by cxoinsightme
CHRIS GANLY, VP ANALYST AT GARTNER, ON HOW TO MANAGE THE PRESSURE TO REDUCE IT COSTS IN THE SHORT TERM WITHOUT HARMING YOUR ORGANIZATION IN THE MID-TO-LONG TERM.
Amid inflation and the threat of recession, many organizations face demands for short-term cost reductions, even if they plan to deploy technology in the longerterm to sustainably reduce the cost of doing business and create a competitive advantage. The question for CIOs is how to cut costs while inflicting the least damage on the mid- and long-term health of the business.
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Gartner research shows that while most CFOs have been relying on pricingfocused strategies to offset inflation, 39% will zero in on cost cutting if inflation remains persistently high in 4Q22. That will soon turn into explicit demands for rapid cost cutting.
Despite the urgency and pressure, pause and remember that there’s little value in cutting or stopping projects or services where costs have already been spent or incurred. Also, you’ll hurt the organisation’s ability to ramp up when conditions improve if you cut in areas where you have already invested or are ready to deliver — and in key initiatives that can’t be easily restarted. such as expense accounts, and key balance sheet accounts, including expense accruals and prepayments. Use this view to identify specific cash reductions that will immediately have an impact.
No. 6: Target unspent and uncommitted expenses Unless payments (or commitments) can be recovered or prepayments returned, the most immediate impact will be on unspent or uncommitted payments. Evaluate contracts for renegotiation and termination clauses.
No. 7: Address capital Typically, operating expenditures (opex) are the easiest to impact, but capital expenditures (capex) can also be reduced. Gartner IT Key Metrics Data shows that 25% of the average IT budget is spent on capital, so ensure that the complete range of IT spend is considered for rapid reductions.
No. 8: Sunk costs are irrelevant When it comes to saving money, it is commonly said that “sunk costs are irrelevant,” meaning that future spend should be considered without relation to past spending or “sunk costs.” From a rapid cost reduction standpoint this is true, but it’s still worth considering whether the savings will be more than the benefits that can and will be delivered by continuing.
No. 9: Address discretionary and nondiscretionary cost Discretionary spending, such as for new projects, additional capabilities or services, is often a seemingly easier place to cut. However, even nondiscretionary “run the business” expenses, such as IT infrastructure and operations, can be cut by reducing usage or service levels.
No. 10: Tackle both variable and fixed costs Fixed costs are expenses that remain constant, regardless of activity or volume, such as office rent, subscriptions and payroll. For fixed costs, focus on elimination. Variable costs change with activity or volume, for example, telecommunications, contractors and consumables. For variable costs, focus on both reduction and elimination.
10 rules for rapid IT cost reduction
Instead, assess your IT cost reduction options with these rules in mind.
No. 1: Target immediate impact Eliminate, reduce or suspend items that will deliver an impact in weeks or months, not in years. For example, target expenses that are incurred and paid monthly or quarterly on a pay-as-you-go basis, rather than annually.
No. 2: Reduce, don’t freeze Focus on costs that can truly be reduced or eliminated. You don’t want simply to freeze costs for the current period only to have them reappear later.
No. 3: Cash is king Target items that will have a real cash impact on the profit and loss statement rather than noncash items like depreciation or amortisation. For example, cost savings in cloud services have a real cash impact, as opposed to reducing on-premises software licenses or owned assets like hardware. Selling and leasing back assets can provide real cash savings as well.
No. 4: Plan to do it once Most organisations don’t cut deeply enough the first time, which means they often need to revisit costs and do it again. This creates a destructive and unproductive cycle of uncertainty, effort and lost productivity. This is particularly relevant for staff cuts, where cycles of ongoing reductions can be especially dangerous.
No. 5: Carefully inspect accounts Work with your finance partner to obtain a solid view of the expense-level detail,